906 Chapter 31
again make war against each other. Germany also agreed to respect the existing
borders of France and Belgium. It then was admitted to the League of Nations.
In 1928, the hopes raised by the “spirit of Locarno” led to the Kellogg-Briand
peace pact. Frank Kellogg, the U.S. Secretary of State, arranged this agreement
with France’s Briand. Almost every country in the world, including the Soviet
Union, signed. They pledged “to renounce war as an instrument of national policy.”
Unfortunately, the treaty had no means to enforce its provisions. The League of
Nations, the obvious choice as enforcer, had no armed forces. The refusal of the
United States to join the League also weakened it. Nonetheless, the peace agree-
ments seemed a good start.Financial Collapse
In the late 1920s, American economic prosperity largely sustained the world econ-
omy. If the U.S. economy weakened, the whole world’s economic system might col-
lapse. In 1929, it did.A Flawed U.S. EconomyDespite prosperity, several weaknesses in the U.S.
economy caused serious problems. These included uneven distribution of wealth,
overproduction by business and agriculture, and the fact that many Americans
were buying less.
By 1929, American factories were turning out nearly half
of the world’s industrial goods. The rising productivity led
to enormous profits. However, this new wealth was not
evenly distributed. The richest 5 percent of the population
received 33 percent of all personal income in 1929. Yet 60
percent of all American families earned less than $2,000 a
year. Thus, most families were too poor to buy the goods
being produced. Unable to sell all their goods, store owners
eventually cut back their orders from factories. Factories in
turn reduced production and laid off workers. A downward
economic spiral began. As more workers lost their jobs,
families bought even fewer goods. In turn, factories made
further cuts in production and laid off more workers.
During the 1920s, overproduction affected American
farmers as well. Scientific farming methods and new farm
machinery had dramatically increased crop yields.
American farmers were producing more food. Meanwhile,
they faced new competition from farmers in Australia, Latin
America, and Europe. As a result, a worldwide surplus of
agricultural products drove prices and profits down.
Unable to sell their crops at a profit, many farmers could
not pay off the bank loans that kept them in business. Their
unpaid debts weakened banks and forced some to close. The
danger signs of overproduction by factories and farms
should have warned people against gambling on the stock
market. Yet no one heeded the warning.
The Stock Market CrashesIn 1929, New York City’s Wall
Street was the financial capital of the world. Banks and
investment companies lined its sidewalks. At Wall Street’s
New York Stock Exchange, optimism about the booming
U.S. economy showed in soaring prices for stocks. To get in
on the boom, many middle-income people began buyingIdentifying
Problems
What major
weaknesses had
appeared in the
American economy
by 1929?Investing in Stocks
Stocks are shares of ownership in a
company. Businesses get money to
operate by selling “shares” of stock to
investors, or buyers. Companies pay
interest on the invested money in the
form of dividends to the shareholders.
Dividends rise or fall depending on a
company’s profits.
Investors do not buy stocks
directly from the company; instead,
stockbrokers transact the business of
buying and selling.
Investors hope to make more
money on stocks than if they put
their money elsewhere, such as in a
savings account with a fixed rate of
interest. However, if the stock price
goes down, investors lose money
when they sell their stock at a lower
price than when they bought it.510152025301925Price Index1926 1927 1928 1929 1930 1931 1932 1933Stock Prices, 1925–1933Source: Historical Statistics of the United States